A STROKE OF GENIUS!
by Rob Kirby
August 5, 2005

I have to take my hat off to the folks at Toronto’s Bullion Marketing Services Inc. for their recent commissioning of a report by Ibbotson Associates on the significance of 7 major asset classes on the returns of conservative, moderate and aggressive investment portfolios.

Here’s why:

Firstly, for those who are not aware, Ibbotson Associates are generally accepted as and referred to in the investment industry as the quintessential authority on what optimal asset allocation is or should be – period!

Second, the study back tested, covering a 33 year period from 1971 to 2004 – so during the relevant time span, all asset classes ‘had their turn’ or ‘their moment in the sun’, so to speak, in terms of being in or out of favor.

THE IMPORTANCE OF WHAT IBBOTSON FOUND IN THEIR STUDY IS OR SHOULD BE MUSIC TO ANY FAN OF PRECIOUS METALS OR GOLD BUG’S EARS. IT IS ALSO OF VITAL IMPORTANCE TO EVEN THE MOST ARDENT ANTI – GOLD PROPONENTS. The study found that Precious Metals is the only one of the seven asset classes that had a negative correlation to the rest of the components in the portfolios [the other six asset classes]. Furthermore, it was the only asset class that had a positive coefficient to inflation [did well as an investment in times of inflation].

Importantly, it was found,

“that precious metals performed best when they were needed the most by providing positive returns during the years that traditional asset classes had negative returns. Ibbotson determined that investors can potentially improve the risk-to-reward ratio in conservative, moderate and aggressive portfolios by including precious metals bullion with allocations of 7.1%, 12.5% and 15.7% respectively.”

What this means dear reader; this study is the first of its kind that I am aware of to ever be conducted by an organization such as Ibbotson - whose findings are considered to be above reproach - clearly demonstrating that all portfolios on the risk spectrum benefit from the inclusion of precious metals over time. Put another way folks, unlike me - Ibbotson Associates ARE NOT GOLD BUGS, yet their findings clearly stipulate that precious metals have a place in properly constructed portfolios of all investors from conservative to aggressive risk takers.

The results of this study – as its results disseminate - absolutely should have a positive impact on the price of precious metals going forward. While I often write about Central Banks and their disdain for precious metals, one should stop an consider the weight that an opinion from an organization like Ibbotson carries in both the pension and mutual fund industry. Remember ladies and gentlemen, the entire market cap of the precious metals sector is very small and the change in investor sentiment that could be spurred by a study such as this could/should, over time, be the type of catalyst the precious metals sector has not seen for about 30 years.

No one in the investment community should underestimate the importance and potential effect of this study. What I cannot figure out is why anyone hasn’t commissioned a study like this already? What I can say is that I’m jealous that I didn’t.

* For disclosure purposes, I have no association with Bullion Marketing Services of Toronto nor have I been compensated in any manner for writing this piece. While some might construe this article as advertising, I consider this development as important financial news. – Rob Kirby

© 2005 Rob Kirby
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Rob Kirby
Kirby Analytics
Toronto, Ontario, Canada
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